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FINANCIAL ACCOUNTING.
1:- NATURE AND SCOPE OF ACCOUNTING
Accounting Accounting is the process of of keeping records of money earned and spent by a person Organisation It involves systematically Recording, Summarizing and reporting financial transactions to provide insights into organization's an financual performance and position Accounting - Definition According Accounting to American Accounting Association Accounting is the process and Communicating economic ifling. of identif if fing, measuring information to permit informed judgements and decisions by the users of accounting". Need of Accounting *The basic need of ace of accounting is know the financial position of business
- To know profit and loss account of business (Tracking Financial performance)
- Performance evaluation and Strategic planning
- It helps business comply with legal and financial reporting requirements. Objectives of accounting i)To keep systematic records: Accounting is done to keep a systematic record of financial transactions. Systematic record of various assets and liabilities of the business is also to be maintained. ii) To ascertain the net effect of the business operations i.e., profit or loss of business: We know that the primary objective of business is to make profit and the businessman is very much interested in knowing the same. A proper record of income and expenses facilitates the preparation of the profit and loss account (income statement). The profit and loss account reveals the profit earned or loss incurred by the business firm during a particular period. iii) To ascertain the financial position of the business: The businessman is not only interested in knowing the operating results, but also interested in knowing the financial position of his business i.e., where it stands. In other words, he wants to know when the business owes to others and what it owns and what happened to his capital – whether the capital increased or decreased or remained constant. A systematic record of various
assets and liabilities facilitates the preparation of a statement known as ‘balance sheet’ (position statement) which answers these questions. iv ) To provide accounting information to interested parties: Apart from the owners, there are various other parties who are interested in knowing about the business firm, such as the management, the bank, the creditors, the tax authorities, etc. For this purpose, the accounting system has to furnish the required information. Book keeping Bookkeeping is the process of systematic recording and classification of financial transactions of an organisation. Bookkeeping process consists of the following steps:
- Identifying a financial transaction
- Recording a financial transaction
- Preparing a ledger account
- Preparing trial balance Users of Accounting Internal Users: - Owners/Shareholders: Assess business performance and the value of their investment. - Managers: Plan, monitor, and make business decisions. - Employees: Used to understand compensation and job security. - Internal Auditors: Assess the accuracy and reliability of financial statements. - Management: Use financial information for operational and strategic decisions. External Users: - Investors: Assess the risk and return of potential investments. - Lenders: Assess a company's ability to repay loans. - Creditors: Assess a company's ability to settle trade obligations. - Suppliers: Assess the creditworthiness of customers before offering credit. - Customers: May be indirectly interested in a supplier's financial health to ensure delivery. - Government: Used for tax and regulatory purposes. - Tax Authorities: Determine whether a business has declared the correct amount of tax. - Regulatory Agencies: Ensure compliance with accounting standards and regulations. - The Public: Use financial information for research and financial news. - Analysts: Analyze financial information to assess the financial health of a company. - Potential Investors: Assess the financial health of a company before investing.
Functions of accounting Recording Transactions : Systematically documenting all financial transactions to maintain accurate and comprehensive records. Classifying Data : Organizing recorded transactions into categories such as assets, liabilities, revenues, and expenses for clarity and ease of analysis. Summarizing Information : Compiling and condensing classified data into financial statements like income statements and balance sheets to provide an overview of financial performance. Interpreting Results : Analyzing financial data to assess business performance, profitability, and financial position, aiding in informed decision-making. Communicating Findings : Presenting financial information to stakeholders, including management, investors, and regulatory bodies, to ensure transparency and compliance. Protecting Assets : Implementing controls and safeguards to prevent unauthorized use or misappropriation of business assets. Facilitating Decision-Making : Providing relevant financial information to support strategic planning, budgeting, and operational decisions.
2: ACCOUNTING PROCESS AND RULES
Process of accounting/ Accounting Cycle Recording Transactions : Systematically documenting all financial transactions to maintain accurate and comprehensive records. Classifying Data : Organizing recorded transactions into categories such as assets, liabilities, revenues, and expenses for clarity and ease of analysis. Summarizing Information : Compiling and condensing classified data into financial statements like income statements and balance sheets to provide an overview of financial performance. Interpreting Results : Analyzing financial data to assess business performance, profitability, and financial position, aiding in informed decision-making. Communicating Findings : Presenting financial information to stakeholders, including management, investors, and regulatory bodies, to ensure transparency and compliance. Protecting Assets : Implementing controls and safeguards to prevent unauthorized use or misappropriation of business assets. Facilitating Decision-Making : Providing relevant financial information to support strategic planning, budgeting, and operational decisions. Types of accounts
1. Personal Account - Definition : Accounts related to individuals, firms, companies, or organizations. - Golden Rule : Debit the receiver, Credit the giver. - Example : If you pay ₹5,000 to a supplier, debit the supplier's account (receiver) and credit the cash account (giver). 2. Real Account - Definition : Accounts pertaining to assets and properties, both tangible and intangible. - Golden Rule : Debit what comes in, Credit what goes out. - Example : Purchasing machinery for ₹50,000: debit the machinery account (what comes in) and credit the cash account (what goes out). 3. Nominal Account
These are the rules, standards, and procedures followed by accountants when preparing financial statements. They include concepts, conventions, and assumptions that ensure uniformity and comparability of financial information. Accounting Conventions:
- Consistency: Using the same accounting methods consistently over time. - Full Disclosure: Disclosing all relevant and material information in financial statements. - Materiality: Disclosing information that could affect user decisions. - Conservatism: Being cautious and not overstating assets or income or understating liabilities. - Cost-Benefit: Balancing the cost of providing information with its benefits. Accounting Concepts: - Business Entity: Separating business transactions from personal transactions of the owner(s). - Monetary Unit: Recording transactions in a stable monetary unit (e.g., currency). - Accounting Period: Dividing economic life into accounting periods (e.g., fiscal years). - Historical Cost: Recording assets at their original cost. - Going Concern: Assuming the business will continue operating for the foreseeable future. - Objectivity: Supporting financial statements with verifiable evidence. - Matching: Matching expenses with the revenues they generate. - Regularity: Adhering to established accounting rules and procedures. - Sincerity: Providing true and accurate financial information. - Permanence of Methods: Using consistent accounting methods over time. - Non-Compensation: Reporting all transactions separately, without offsetting gains and losses. - Prudence: Being cautious and not overstating assets or understating liabilities. - Continuity: Assuming the business will continue operating. - Periodicity: Dividing the company's financial activities into standard time periods. System of book keeping A bookkeeping system is a structured method used to record, classify, and manage financial transactions of a business. It ensures accurate financial reporting, aids in compliance with regulations, and provides insights for decision-making. The choice of system depends on the business's size, complexity, and specific needs. Types of Bookkeeping Systems
1. Single-Entry Bookkeeping
◦ Records each transaction once, typically in a cash book.
◦ Suitable for small businesses with straightforward financial activities.
◦ Offers simplicity but lacks comprehensive tracking of assets and liabilities.
2. Double-Entry Bookkeeping
◦ Every transaction is recorded twice: once as a debit and once as a credit.
◦ Maintains the accounting equation: Assets = Liabilities + Equity.
◦ Provides a more accurate financial picture and helps in error detection.
4: ACCOUNTING STANDARDS Accounting Standards are authoritative guidelines that govern the preparation and presentation of financial statements. They ensure consistency, transparency, and comparability in financial reporting, facilitating informed decision-making by stakeholders. Nature of Accounting Standards
1. Serve as a Guide to Accountants Accounting standards provide a structured framework for accountants, offering clear guidelines on various accounting treatments. For instance, they specify methods for inventory valuation, ensuring uniformity in financial statements. 2. Act as a Dictator
PROCEDURE FOR ISSUING AS IN INDIA
1) Determination of the need of an AS First, the Accounting Standard Board determines the broad areas in which accounting standards needs to be formulated. 2) Constituting Study Group Study Group will be constituted consisting the members of the Institute of Chartered Accountants of India. The motive behind constitution of this group is to assist the accounting Standard Board in its activities. 3) Drafting the Standard The Study Group Prepares draft of the proposed Standard. The proposed draft enlists the following areas: a) Objective of the standard. b) Scope of the Standard. c) Definitions of the terms used in the standard d) Recognition & Measurement Principles e) Presentation & Disclosure requirements. 4) Analyzing the Draft ASB in this stage considers the Preliminary draft prepared by the Study Group. In case anything needs to be revised than Accounting Standard Board takes the following steps. a) ASB makes the revision b) ASB refers the same to the study Group 5) Circulation of the Draft In this step, the ASB circulates the AS draft to the council members of the Institute of Chartered Accountants of India and the following specifies bodies for their comments. a) The Institute of Works & Cost Accountants of India b) The Institute of Company Secretaries of India. c) Ministry of Company Affairs. d) Comptroller & Auditor General of India e) Central Board of Direct Taxes f) Standing Committee of Public Enterprises g) Reserve Bank of India h) Indian Banks Association. i) Securities & Exchange Board of India. j) Associated Chamber of Commerce & Industry, Confederation of Indian Industry and Federation of Indian Chambers of Commerce & Industry. k) Any other body considered relevant by the ASB. 6) Holding Discussion and Finalizing Exposure Draft ASB holds meeting with the representatives of above mentioned bodies for the purpose of determining their views on the Draft Accounting Standard. Based on analyses of the discussion, ASB finalizes the exposure draft of proposed accounting standards. 7) Circulation of Exposure Draft The exposure Draft of the proposed standards is issued for comments the members of the ICAI and the public. 8) Finalizing the Exposure Draft
Based on the comments received, the ASB finalizes the draft of the proposed standards. Finally ASB submits the same to the council of the ICAI. 9) Modifying & Issuing the Accounting Standard The council of the ICAI then considers the finalized draft standard and if necessary modifies the same in consultation with the ASB. The ICAI then issues the Accounting Standard after modification if any on the relevant subject. Ind AS 101: Salient Features of First-Time Adoption of Indian Accounting Standards Indian Accounting Standard (Ind AS) 101 provides a structured framework for entities transitioning from previous Indian GAAP to Ind AS, ensuring transparency, comparability, and a suitable starting point for accounting under Ind AS. The standard mandates the preparation of an opening Ind AS balance sheet at the beginning of the earliest comparative period presented. Entities are required to recognize all assets and liabilities as per Ind AS, reclassify items as necessary, and apply Ind AS in measuring recognized assets and liabilities. While full retrospective application is generally required, Ind AS 101 offers certain mandatory exceptions and optional exemptions to ease the transition process. Reconciliation and disclosure requirements are specified to explain the effects of the transition, including adjustments to equity, total comprehensive income, and cash flows. The standard aims to provide high-quality information that is transparent, comparable, and cost-effective for users of financial statements. CURRENTLY PREVAILING ACCOUNTING STANDARDS IN INDIA AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after the Balance Sheet Date AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts (revised 2002) AS 8 Accounting Policies, Chanages in Accounting estimates and Errors. AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003), AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 Employee Benefits (revised 2005) AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases
Challenges and Considerations
- Implementation Costs : Transitioning to IFRS can involve significant costs, including training personnel and updating financial reporting systems. - Interpretation Flexibility : The principles-based nature of IFRS requires entities to exercise judgment, which can lead to variations in application and potential inconsistencies. - Ongoing Updates : The continuous evolution of IFRS necessitates that companies stay abreast of changes to ensure compliance and maintain the relevance of their financial reporting. Measurement of Business Income: The measurement of business income is a fundamental aspect of financial accounting, providing insights into a company's profitability and operational efficiency. Accurate measurement is essential for stakeholders, including investors, creditors, and management, to make informed decisions. **Methods of Measuring Business Income
- Net Worth Method** : This approach compares the owner's equity (capital) at the beginning and end of an accounting period. An increase indicates a profit, while a decrease suggests a loss. 2. Matching Principle : Under this method, income is determined by matching revenues with the expenses incurred to generate those revenues within the same period. This principle is foundational in accrual accounting. **Objectives of Measuring Business Income
- Assess Managerial Efficiency** : Evaluates how effectively management utilizes resources to generate profits. - Determine Creditworthiness : Helps in assessing a company's ability to meet short-term obligations. - Tax Calculation : Provides a basis for calculating taxable income. - Investment Decisions : Assists investors in making informed decisions regarding capital allocation. - Dividend Policy Formulation : Guides decisions related to profit distribution. **Approaches to Measuring Income
- Realization Concept** : Income is recognized when it is earned, regardless of when cash is received.
- Accrual Basis : Recognizes income when it is earned and expenses when they are incurred, irrespective of cash transactions. Accounting Standards and Income Measurement International Financial Reporting Standards (IFRS) and Indian Accounting Standards (Ind AS) provide guidelines for income measurement. For instance, IFRS 15 outlines a five-step model for revenue recognition, ensuring consistency and comparability across entities. Similarly, Ind AS 18 emphasizes the importance of recognizing income when it is probable that future economic benefits will flow to the entity. - Accurate Measurement : Essential for assessing profitability and making informed decisions. - Consistency : Adherence to established accounting standards ensures comparability. - Holistic View : Combining various methods and principles provides a comprehensive understanding of business income.
